Railway Reform

8/14/2019 Railway Reform

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EUROPEAN CONFERENCE OF MINISTERS OF TRANSPORT

Railway

Reform

Charges forthe Use of

Infrastructure

Railway

Reform

& Charges forthe Use of

Infrastructure


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EUROPEAN CONFERENCE OF MINISTERS OF TRANSPORT

Railway

Reform

& Charges forthe Use of

Infrastructure


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EUROPEAN CONFERENCE OF MINISTERS OF TRANSPORT (ECMT)

The European Conference of Ministers of Transport (ECMT) is an inter-governmental organisationestablished by a Protocol signed in Brussels on 17 October 1953. It comprises the Ministers ofTransport of 43 full Member countries: Albania, Armenia, Austria, Azerbaijan, Belarus, Belgium,Bosnia-Herzegovina, Bulgaria, Croatia, the Czech Republic, Denmark, Estonia, Finland, France,FRY Macedonia, Georgia, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania,Luxembourg, Malta, Moldova, Netherlands, Norway, Poland, Portugal, Romania, Russia, Serbia andMontenegro, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine and the United Kingdom.There are seven Associate member countries (Australia, Canada, Japan, Korea, Mexico, New Zealand and theUnited States) and one Observer country (Morocco).

The ECMT is a forum in which Ministers responsible for transport, and more specifically the inland

transport sector, can co-operate on policy. Within this forum, Ministers can openly discuss currentproblems and agree upon joint approaches aimed at improving the utilization and at ensuring therational development of European transport systems of international importance.

At present, ECMT has a dual role. On one hand it helps to create an integrated transport systemthroughout the enlarged Europe that is economically efficient and meets environmental and safetystandards. In order to achieve this, it is important for ECMT to help build a bridge between the EuropeanUnion and the rest of the European continent at a political level.

On the other hand, ECMT's mission is also to develop reflections on long-term trends in thetransport sector and to study the implications for the sector of increased globalisation. The activities inthis regard have recently been reinforced by the setting up of a New Joint OECD/ECMT TransportResearch Centre.

Publi en franais sous le titre :

Rforme ferroviaire et tarification de lusage des infrastructures

Further information about the ECMT is available on Internet at the following address:

www.cemt.org

ECMT 2005 ECMT Publications are distributed by: OECD Publications Service,2, rue Andr Pascal, 75775 PARIS CEDEX 16, France


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FOREWORD AND ACKNOWLEDGEMENTS

RAILWAY REFORM AND CHARGES FOR THE USE OF INFRASTRUCTURE ISBN 92 821 0351 X ECMT 2005 3

Foreword and Acknowledgements

European railways are in the middle of a process of far reaching reform to foster competition andpromote the development of international freight and passenger services. Fundamental to this is a

separation of infrastructure management from train operation, requiring the introduction of charges

for the use of the network. Much progress has been made over the last few years in developing

charges to ensure non-discriminatory access to, and efficient use of the rail networks but the

European dimension is missing, particularly from the freight market. Integration of European

markets should provide great opportunities for rail freight transport to grow. The purpose of thisreport is to set out how barriers to this growth arising from differences in the way trains pay to use

national networks can be overcome. It recommends moving to a set of simple charges for freight that

create similar incentives for the management and planning of train operations across national

borders. The recommendations were welcomed by Transport Ministers meeting at the 2005 ECMT

Council in Moscow and adopted.

Decisions on the structure of charges are constrained by the way in which competition, in both

freight and passenger markets, is designed to develop under national and European transport

policies. The analysis prepared for Ministers includes an examination of the way charges can be

structured differently in different parts of the rail market, (suburban passenger services, inter-city

services, high speed trains, domestic and international freight, etc.), to increase cost recovery and

maximise the financial stability of infrastructure managers without damaging the development of

competition. Political concensus over the different models discussed for competition in passenger

markets has yet to emerge and was reflected in the discussions in Moscow but the recommendations

agreed accommodate this and should prove durable.

The ECMT is grateful to Chris Nash and Bryan Matthews of ITS, University of Leeds and to Lou

Thompson of Thompson, Galenson and Associates, principal authors of this report. The Secretariat

is also grateful to the members of the ECMT Railway Group and to the experts from rail regulatory

agencies and rail companies that provided and verified data and information for this report and

made presentations to a series of workshops organised in 2004 and 2005 (see the ECMT website fordetails www.cemt.org/topics/rail/raildocs.htm). The work was discussed extensively with the

Working Group on Track Access Charges established by the European Commission, which will take

forward the recommendations within the European Union.


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TABLE OF CONTENTS


Table of Contents

Executive Summary................................................................................................................ 9

Chapter 1. Introduction and Regulatory Environment.................................................. 17

1.1. Introduction....................................................................................................................... 18

1.2. The Legislative Background............................................................................................. 21

1.3. The Potential Objectives of Infrastructure Separation ................................................ 25

Notes .......................................................................................................................................... 27

Chapter 2. Rail Infrastructure Charges in Practice ........................................................ 29

2.1. Principles............................................................................................................................ 30

2.2. Implementation simple and two part charges .......................................................... 35

2.3. Practice ............................................................................................................................... 36

2.4. Conclusions on economic principles ............................................................................. 43

Notes .......................................................................................................................................... 45

Chapter 3. Issues in the Choice of Access Charging Regimes ..................................... 47

3.1. Basic choices in access charging..................................................................................... 48

3.2. The major cost and policy drivers .................................................................................. 49

Notes .......................................................................................................................................... 53

Chapter 4. The Role of Regulation..................................................................................... 55

4.1. EC Directives...................................................................................................................... 56

4.2. ECMT Resolutions ............................................................................................................. 56

4.3. Why regulate?.................................................................................................................... 56

4.4. What the regulator should do...................................................................................... 574.5. What is meant by independence? .................................................................................. 59

4.6. National regulators ........................................................................................................... 60

4.7. Conclusions on rail regulation........................................................................................ 65

Notes .......................................................................................................................................... 66

Chapter 5. Competitive Tendering................................................................................... 67

5.1. Extent of competitive tendering ..................................................................................... 69

5.2. Experience of competitive tendering ............................................................................. 70

5.3. Conclusions on competitive tendering.......................................................................... 75


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TABLE OF CONTENTS

RAILWAY REFORM AND CHARGES FOR THE USE OF INFRASTRUCTURE ISBN 92 821 0351 X ECMT 20056

Chapter 6. Conclusions and Policy Recommendations................................................. 77

6.1. Public and transparent line of business data............................................................... 78

6.2. Policy-based allocations of cost between freight and passenger traffic.................. 78

6.3. Common approach and data set for the calculation of marginal infrastructure

costs................................................................................................................................... 79

6.4. Track quality and the actual costs of maintenance and renewal............................. 796.5. Government commitments............................................................................................ 79

6.6. Two-part charges............................................................................................................. 80

6.7. Market differentiation..................................................................................................... 80

6.8. Simplified access charges for freight especially on international routes................ 83

6.9. Recommendations........................................................................................................... 84

6.10. Follow-up .......................................................................................................................... 86

References ................................................................................................................................. 86

Appendix A. National Infrastructure Charging .................................................................. 89

Austria ....................................................................................................................................... 90

Belgium ...................................................................................................................................... 91

Czech Republic ......................................................................................................................... 92

Denmark .................................................................................................................................... 92

Estonia ....................................................................................................................................... 93

Finland ....................................................................................................................................... 95

France ........................................................................................................................................ 96

Germany .................................................................................................................................... 98

Hungary ..................................................................................................................................... 101

Italy ............................................................................................................................................ 102

Latvia ......................................................................................................................................... 105

Netherlands .............................................................................................................................. 105

Poland ........................................................................................................................................ 107

Portugal ..................................................................................................................................... 109

Romania .................................................................................................................................... 110

Slovenia ..................................................................................................................................... 112

Sweden ...................................................................................................................................... 113

Switzerland ............................................................................................................................... 114

United Kingdom ....................................................................................................................... 115

Appendix B. Typology of Rail Networks and Access Charging Regimes ...................... 119

Appendix C. Rail Regulators and their Web sites .............................................................. 129


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TABLE OF CONTENTS


List of tables

0.1. Industry structure and regulatory arrangements...................................................... 14

2.1. Rail infrastructure charges Summary Table ............................................................ 30

2.2. Categories Included in costs as variable charges....................................................... 33

2.3. Cost definitions............................................................................................................... 36

4.1. Industry structure and regulatory arrangements...................................................... 614.2. Regulatory responsibilities ............................................................................................ 62

5.1. Status of competitive tendering for train operations................................................ 69

5.2. Rail franchises First round.......................................................................................... 71

5.3. Government support to the rail industry.................................................................... 72

5.4. Rail franchise profitability, operating profit, 1998/9.................................................. 72

5.5. TOCs, passenger-km (million), track access charges and subsidies

on main network ( million).......................................................................................... 73

6.1. Access charge regimes for types of rail users............................................................. 82

A.1. Average level of charges ................................................................................................ 97

A.2. Charges on the RFF Network......................................................................................... 98A.3. Examples of average charges in /km ......................................................................... 98

A.4. Principles of the track access charging scheme in 2003 ........................................... 100

A.5. Base charges per track category in the access charging scheme in 2003............... 101

A.6. Value of the section/node according to tariff area .................................................... 103

A.7. Unit value (/km) of the km/min portion on the core network according to

track characteristics ....................................................................................................... 104

A.8. Average unit rates (PLN/ train-km) for basic services in years 2003-2005.............. 109

A.9. Value of coefficient that takes into consideration total gross load of a train........ 109

List of figures

0.1. Percentage of total cost covered by infrastructure charges in 2004 ....................... 12

0.2. Average access charges in 2004 ................................................................................... 12

2.1. Per cent of total cost covered by infrastructure charges in 2004 ............................ 40

2.2. Average access charges in 2004 ................................................................................... 40

2.3. Network complexity versus intensity of use, train-km per km of line basis ........ 42

2.4. Network complexity versus intensity of use ............................................................. 42

2.5. Traffic growth 1990-2003 .............................................................................................. 42

3.1. Traffic mix in 2003 (percentage passenger traffic) .................................................... 49

3.2. Percentage of international freight traffic (2002-2003) ............................................. 503.3. Percentage of international passenger traffic (2002-2003) ....................................... 50

5.1. Rail passenger and freight volumes (1979 to 2002/03) .............................................. 71

6.1. Average freight train size in 2004 (net tonnes): The Baltic States are different ... 82


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ISBN 92-821-0351-X

Railway Reform and Charges for the Use of Infrastructure

ECMT 2005


Executive Summary


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EXECUTIVE SUMMARY


Conclusions

Existing infrastructure charging regimes are not fully consistent with Ministers

objectives:

For promoting financially stable infrastructure providers.

For providing effective price signals to users of rail infrastructure. For promoting effective competition in the markets (especially international freight)

where competition would be sustainable.

The divergence of current infrastructure charges is illustrated in Figure 0.1,showing

cost recovery rates, and Figure 0.2, showing average charge levels. Some differences are to

be expected. For example, the upper bound for cost recovery is a question for political decision

at the national level. Also the mix of traffic (see Figure 3.1) and traffic densities vary greatly

between countries and this has a strong influence on costs.

Some of the differences observed, however, create financial risks or undermine the

competitiveness of rail services. Some countries charge at levels significantly below the rational lower bound represented

by marginal costs, including renewals. It makes little sense to carry traffic that can not

even pay the marginal costs it imposes on the network in terms of wear and tear and

train planning.1

Some charging systems result in freight trains covering some of the costs of passenger

trains in order to push down the budget transfers required to pay for passenger service

obligations. This is financially un-sustainable as it will destroy the competitiveness of

rail freight.

Differences in the way charges are structured by countries along international corridors

can create barriers to international services. Freight train charges that are structured to

provide incentives to consolidate loads and run fewer, longer trains in one country, and

structured to promote operating short, light trains in a neighbouring country complicate

train path planning and increase the costs of international paths. This will suppress

international rail traffic.

There has so far been a failure to co-operate internationally to correct these distortions,

seriously undermining international rail markets. Harmonizing the structure of charges for

freight trains would:

Reduce the cost of international services, improving competitiveness.

Facilitate the planning of international services.

Enable railways to be more responsive in quoting prices to shippers.

Recommendations

Ministers need to cooperate to promote the development of more coherent charges for

the use of infrastructure. For international rail freight services this is an urgent priority.

Ministers will need to provide guidance to their national infrastructure managers and

consult with rail regulatory agencies to facilitate this.

Independent2 economic rail regulatory authorities can play an important role in

ensuring many of the specific recommendations that follow are implemented, and couldplay a useful role in all member countries.


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EXECUTIVE SUMMARY


Harmonise charges for international freight trains

The structure of charges for freight trains should be harmonised, especially along keyinternational corridors. Charges should be set on the basis of marginal costs, with simple

mark-ups where required. There could be merit in adopting similar charges for domestic

freight as well in many countries.

These charges need not be uniform in level but must be consistent in structure and

should be based on a set of simple factors of use, at least outside of capacity bottlenecks

and peak hours. Charges per gross tonne-km should be employed to reflect maintenance

and renewal costs for track.3Where freight capacity is not constrained, such a single factor,

simple charge may be sufficient. Where capacity for freight is constrained (and the marginal

costs of freight traffic are significant) charges per train-km may also be useful.

Figure 0.1. Percentage of total cost covered by infrastructure charges in 2004

Note: Cost recovery = Revenues from charges as a proportion of total expenditure on the network on operations,maintenance, renewals, interest and depreciation; Light shading indicates central and eastern European countries.Marginal costs can be expected to lie at roughly 15 to 20% of the cost figures reported.

Figure 0.2. Average access charges in 2004/train-km, excluding cost of electric traction

Note: Baltic freight trains are much larger than elsewhere. Baltic access charges are not directly comparable withthose in other countries and have been adjusted here. In Estonia, for example, a typical 3 145 tonne train is charged 11 per train-km. Data displayed for all countries for which reliable figures have been collected.


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EXECUTIVE SUMMARY


It should be accepted, however, that where rail freight is the dominant use of the

network and its market position is strong (as in the Baltic States for example) an alternative

approach based on full costs is appropriate.

Structure charges for passenger and freight trains to balance competition

and financial objectivesNational access charge regimes should be related to the complexity and intensity of

the use of the rail network. Countries with intensive traffic and a multiplicity of users could

best construct their access regime from a mix of approaches:

Full cost based charges (with costs recovered as a two part tariff) for suburban and non-

competing intercity passenger operators running on exclusive rights of way.

It makes sense to recover full costs from these services where they are the dominant

user of the system, generating most of the costs, which is almost always the case around

major cities, and generally the case across the whole network in many member countries.

Where passenger trains are a marginal user on freight dominated systems it may be

appropriate to charge them only marginal costs.

In the case of passenger services supported from public budgets under public service

obligations, charging these trains the full costs they impose on the network makes the

costs entailed more transparent for the public authorities that decide on the level of

services that should be provided. This should help reconcile the demands for services

from one part of government (for example transport local authorities) with the resources

available from public budgets for rail infrastructure.

Simple marginal cost based charges, plus a mark-up where necessary, for situations where

intercity passenger trains will compete on the same tracks. Fixed charges need to be avoided

as they almost always present a barrier to small operators seeking to enter the market.Such a mixed approach, with simple marginal costs charges for freight, with a mark up

where required for higher cost recovery, will permit the best balance among competition

and financial stability objectives to be achieved.

Provide for renewals

Infrastructure managers should at least collect marginal costs, including accelerated

renewals, from all trains. Variable, traffic-driven renewal costs, that is the increased

present value of costs that result from having to undertake renewals sooner than if a train

had not been run on the track, are not always charged for at present. As noted above, it

makes little sense to carry traffic that cannot pay at least these costs. For rail freight toremain competitive with alternative modes it is important to achieving recovery of these

infrastructure renewal costs also in other modes of transport.

Respect financial commitments

Transport policy determines the size of the gap between the revenues generated from

access charges and the full cost of maintaining and renewing the infrastructure network.

The key factors are specification of the services to be delivered under public service

contracts and setting the framework for infrastructure charges. Filling the gap from public

funds is essential for financial sustainability, with long term implications for the quality

and safety of the network and the cost of maintaining it. Short term pressures inevitablylead finance ministries and parliaments to seek cuts in spending from time to time that are

inconsistent with existing policy. The chief risk is delays to renewals that cause the condition


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EXECUTIVE SUMMARY


Ensure adequate public information on rail costs and accounts

Getting adequate data into the public domain is pre-requisite to full implementation

of these recommendations. Data is currently insufficient to say with certainty which

infrastructure managers charge below marginal costs or just how serious the practice,

traditional in Eastern Europe, of covering passenger costs from freight charges is.

Ministers should require line of business accounts and a complete record of government

support to be reported annually to public authorities by infrastructure managers and train

operators, in a consistent format. Reports from infrastructure managers should include a

discussion of any changes in the condition of the infrastructure from the previous year, and a

statement of the degree to which income from users plus government support meets or falls

short of the cost of maintaining the infrastructure including any required renewals. This

should be included in the annual Network Statement that infrastructure managers are already

required to produce in the European Union.

There is ample precedent in regulatory experience, for example in the USA and

Canada, for requiring that railways report their annual results in a common format thatpermits analysis of individual railway performance and facilitates comparisons among

railways. The burden this imposes on railways is negligible as they should already be

collecting this information for proper management of their assets.

Europes railways also need a common understanding of how to define and measure

marginal private and external costs for use of rail infrastructure. Joint efforts are needed

for a common approach and a consistent database. This has direct policy relevance and is

not simply a research question.

Notes1. Unless this is explicitly to correct for distortions on other modes and in that case the better course

of action is to remove those distortions.

2. Independent of government as well as train operators and infrastructure managers.

3. Or per wagon-km, which is simpler but less accurately reflects gross weight.


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1. INTRODUCTION AND REGULATORY ENVIRONMENT


1.1. Introduction

It is important for Europes economy to develop a seamlesstransport network. While

air, highway and water transport are more and more able to offer seamless, door-to-door

transport throughout Europe, railways lag behind because of the remaining national

barrier effects. Governments and railways are working to erase these barriers and to

improve the competitive position of rail transport, led by the European Commission

through a series of Directives that aim to open access for national train operators and new

operators to offer seamless international services. The objective has been to encourage

development of Europe-wide competition for international and domestic traffic.In order to ensure efficient use of, and non-discriminatory access to, the rail

infrastructure, the infrastructure businesses must establish an appropriate set of charges

for infrastructure use. Commission Directives require that responsibility for access charge

regimes be independent of any train operator, that they promote efficient use of the

infrastructure, and that they do not discriminate among operators wishing to make

comparable use of the infrastructure.

The economic principles behind an appropriate access regime are well established.

Access charges should reflect the marginal cost (directly related cost) that each user

imposes on the infrastructure provider. To these marginal costs should be added the

external costs (pollution, accidents, congestion, etc.) that each user generates. This is

social marginal cost pricing and, if implemented correctly, will result in the most efficient

use of the rail infrastructure. This approach is also conditioned on the assumption that

Governments will fill the gap between marginal cost and the financial cost of the infrastructure

business.

The issue has been made more complex, however, by the desire of some governments

to charge users more than marginal cost in order to reduce fiscal demands on the State

budget. European Union rules allow States to collect more than marginal costs from users,

but require that the added funds be generated through mark-ups on marginal cost. These

mark-ups are to be applied in a way that encourages efficiency (or rather, does as littleharm to efficiency as possible) and that does not create discrimination among potentially

competing users.

Governments have tended to follow one of three possible approaches: social marginal cost

pricing as recommended by the Commission, with State compensation for the difference

between marginal cost and financial cost (SMC); applying mark-ups to marginal cost in order

to reduce (or eliminate) State compensation and the gap between marginal cost and financial

cost (MC+); or, setting access charges to collect the difference between State contribution and

full financial cost (FC). In principle, the SMC approach yields the most efficient use of the

infrastructure, but it puts the most pressure on State budgets. The MC+ approach, properly

implemented, could yield the best trade-off between efficiency goals and budgetary needs, andmay be completely consistent with achieving the goals of the FC approach. The FC approach

protects the financial results of the infrastructure manager but puts less pressure on it to


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reduce potential inefficiencies in the way it delivers infrastructure services, and may lead to

unnecessary inefficiencies in use of the network. Though the three approaches reflect

differences in philosophy and emphasis, each regime poses common problems, specifically

the measurement of marginal costs, measurement of social costs, and assessment of the

impact on users of the difference between charges and marginal costs.

The access charge regimes have generally been established either by using simple

tariffs, which vary directly with use of the network (gross tonne-km and train-km are the

most common measures of infrastructure use) or by using two part tariffs, in which one

part is variable with use, and one part is fixed in advance in relation to expected capacity

requirements (usually scheduled train-paths or train path-km). The simple systems are

easier and less costly to implement, and are appropriate for less complex networks where

capacity is not an issue and where the mix of use is less complex. Two-part systems are

potentially more efficient in complex, mixed-use networks where more than marginal cost

has to be charged. If used as part of a long run contract they may actually improve incentives

by reflecting the long run costs of the incremental capacity requirements of a particular user,

and in any case they may be less distorting in their effects on train operators decisions than a

mark up on the variable charge. But they can, depending on the size of the fixed component

of the charges, engender discrimination between various sizes or classes of users. This is

particularly the case where the fixed component of the charge is a pure access charge,

unrelated to planned use of the system, or where there are large quantity discounts. Two-

part systems can, in particular, act as a burden on international freight services if the fixed

component of the charge is large.

This study compared the access regimes in over 20 ECMT countries. It finds examples

of the SMC, MC+ and FC approaches, and discusses both simple and two-part regimes in

implementing these approaches. After reviewing the experience to date, and the theoreticalissues in access pricing, the study reaches a number of conclusions:

Because there is neither an agreed method for measuring marginal cost nor adequate

data in a common format for quantifying marginal costs, it is not possible to say with

certainty whether any access regime actually covers marginal cost. There are indications

that some regimes Sweden, for example do not cover marginal costs, especially when

the cost of accelerated renewals1 is considered to be part of marginal costs. This report

considers accelerated renewals (i.e.variable, traffic-driven renewals costs) to be a key

element of marginal costs.

Whatever the merits of the various individual country regimes in closing the gap

between marginal cost and full financial cost (countries clearly vary widely in theirobjectives), the various national regimes are sufficiently disparate as to make international

train operations more difficult. There are three main underlying causes:

To some extent it is due to attempts by some countries to load a high proportion of fixed

costs onto freight operators in order to reduce charges to subsidised passenger operators.

Other countries have attempted in effect to tax transit traffic in order to reduce

charges on domestic or import/export traffic.

The existence of a two-part charge in one country adjoining a country with simple

charges also inherently creates a type of seam that retards international flows.

Differences in the way simple charges are formulated can also create such seams ifone part of a route is charged per train-km and the rest per gross tonne-km, and the

train-km charge is high.


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Two-part systems potentially reduce competition between or among operators in the

same market. They inevitably make the goal of international competition more difficult

to achieve.

International rail freight flows may be particularly burdened by two-part tariffs with a

large fixed component and by the patchwork of tariff structures that make cross-border

management difficult.

Based on these conclusions, the study has five recommendations:

1. It will be critical to develop improved data on infrastructure costs and to make

infrastructure accounting data by line of business activity available to the public domain

(two thirds of expenditure on infrastructure maintenance is funded directly from public

budgets in western Europe).

2. An agreed approach to the measurement of marginal private and external costs is

needed. At this stage agreement is needed on the basic approach to follow in estimating

costs rather than detailed calculations as to the precise level of marginal costs. Most

importantly this requires building a consensus on the importance of including acceleratedrenewals (i.e. variable, traffic-driven renewals costs) in marginal costs, clarifying the

dividing line between renewals and enhancements, and clarifying how to treat expenditures

that only recur at long, perhaps irregular, intervals.

3. International rail freight operations would benefit greatly from consistent SMC or MC+

infrastructure charging regimes, especially on key international corridors. These regimes

should be based on simple factors (not two-part charges) and should be consistent in

structure.

4. Governments should ensure that their infrastructure providers are at least collecting

marginal costs, including accelerated renewals, from users subject to achieving this alsoon other modes of transport. Correspondingly, Ministers must ensure that the gap

between access charges (however structured) and FC is met fully and reliably by State

contributions. Independent regulators have an important role in this regard.

5. National access charging regimes in each country should be related to the complexity

and intensity of the use of the rail network. Countries with intensive traffic and a

multiplicity of users could best construct their access regime from a mix of approaches:

FC (recovered as a 2 part tariff) for suburban and non-competing intercity passenger

users operating on exclusive rights of way.

Simple MC+ or two-part MC+ for situations where intercity passenger trains will

compete on the same tracks.

Simple SMC or simple MC+ for freight.

Such a mixed approach will permit a better balance among competition and financial

stability objectives.

The report begins with a short review of the legislative environment, created mainly by

EU Directives, followed by a brief discussion of the theory of charging for the use of

infrastructure. It then examines the access regimes developed by European railways to see

how the theory and legislative requirements are being implemented in practice. It ends with a

discussion of the economic issues for access charging systems and attempts to draw

conclusions on the most appropriate charges for European railways and makesrecommendations on areas where transport Ministers most urgently need to focus attention.


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The discussions are based on information provided by Transport Ministries and rail

infrastructure managers in response to a questionnaire sent to all ECMT Member countries

in 2004. The questionnaire sought a general description of each access regime along with a

number of detailed aspects of the charges and of the operation of the system (see Appendix A).

These data were then combined with data available from publicly available sources to provide

a summary comparison and typology of the regimes (see Appendix B). To deepen theunderstanding of the issues involved, meetings were held in Rome, Geneva and Paris in

2004 and 2005 at which many of the infrastructure agencies gave detailed presentations

explaining their approach to charging. The presentations are available on the ECMT

website at www.cemt.org/topics/rail/raildocs.htm . Discussions at earlier meetings in Maribor

(TAIEX) and Budapest (IMPRINT) were also taken into account. The work was supervised by

the ECMT Group on Railways and completed in close cooperation with the European

Commission and its Task Force on Track Access Charges.

1.2. The legislative background

Ministers are concerned to enhance the efficiency and sustainability of rail transport

across Europe and for many years ECMT has sought to promote competition in various

forms as part of the means for improving the performance of the transport sector. The

European Commission has played the leading role in developing an international

legislative and regulatory framework to promote competition within the rail sector, while a

number of Member country governments acted earlier, or have gone further in laying the

groundwork for developing competition within their national rail systems. This report is

particularly concerned with the development of charging systems for the use of rail

infrastructure that will promote international train services across Europe. The framework

developed by EU Directives is therefore the starting point for the analysis.

The Commission is concerned by the weak performance of the railways in the EU.2

While the overall economy of the EU has grown strongly, freight traffic on the EU railways

has stagnated and their market share has fallen significantly. A part of the railway decline

is a natural result of structural changes in the economy, favoring higher service quality

over lower transport tariffs. But another part of the poor railway performance is a result of

national border barrier-effects. These persist in railways but no longer affect highways,

waterways and airports. Within the national border fortresses, the railways were

cushioned by national budgets that permitted them to function as integrated monopolies,

effectively isolated from domestic and EU-wide market pressures.

The Commission feared that the railways would become increasingly expensive andirrelevant, even detrimental, to the efficiency of the transport network. Its response has

evolved over a number of years and has covered a very wide range of issues. This paper

deals with one aspect the requirement that the accounts for railway infrastructure be

separated from the accounts for the operation of the railway, that the infrastructure be

opened for access by competing operators other than the national operator, and the

ensuing need for a system for charging all of the various operators for their use of the

infrastructure in order to ensure that all users are charged on equal and non-discriminatory

terms.

Abusive procedures for issuing licenses or safety certificates could potentially create

more important barriers to competition than inappropriate charging systems. While EUDirectives will ensure progress on the licensing issue, the widely differing safety approval


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procedures in the Member States could function to defeat the interoperability and competition

objectives. There are some localized aspects of safety regulation (inspection procedures in

extreme weather conditions, for example) that will legitimately need to be accommodated:

these pose no problem if done transparently and non-discriminately. Other aspects of safety,

for example rigorous driver licensing and qualification on particular lines, are essential, but

could be abused if oversight is not adequate. There are other areas of safety, such as outdatedequipment specifications or inspection procedures that can function to limit international

traffic and competition.

Formally, this paper sets out to review implementation of ECMT resolution 2002/1.

With regard to infrastructure charges the Resolution sets out the following requirements:

Discrimination in the charges applied to different operators in the same market seeking

the same kind of train path and infrastructure service is to be prevented.

Conversely, price discrimination according to train characteristics (such as axle weight)

is essential to cost effective infrastructure provision, and price discrimination between

market segments is appropriate where infrastructure charges are required to remuneratepast or future investment or otherwise cover more than marginal costs.

Infrastructure pricing regulations designed to prevent discrimination between train

operators seeking similar infrastructure services should not result in the elimination of

incentives for efficiency in charging systems and in particular should not prevent the

adoption of two part tariffs designed to promote efficient development of infrastructure.

Elements in infrastructure charges related to marginal costs must provide incentives for

train operators to reduce those costs (for example through improved design of rolling

stock) and not simply match revenues to costs this applies particularly to wear and

tear and to costs related to the environment and accidents.

Where train operations are separated from infrastructure management, regulatory

frameworks, particularly in regard to pricing, should provide incentives for infrastructure

managers to maximize efficiency, to invest cost effectively to meet the demands of all their

customers, and provide infrastructure services that promote the competitiveness of

train services with respect to other modes.

Governments should co-operate to encourage companies across Europe responsible for

rail infrastructure to develop transparent and non-discriminatory charges that facilitate

the marketing of international train operations through a sufficient degree of harmonization

in charging structures and by limiting international cross-subsidy through a degree of

convergence in the level of charges.The Commissions efforts in railway restructuring began with Council Directive 91/440/EC,

which established the basic framework of separating the accounts of infrastructure

management from train operations, while prohibiting the transfer of state aid from one

operator to another. It allowed certain international operators the ability of competitive

access on the national networks, and required that the manager of the infrastructure

charge a fee for access. The fee was to be non-discriminatory and, could in particular

take into account the mileage, the composition of the train and any specific requirements

in terms of such factors as speed, axle load and the degree or period of utilization of the

infrastructure.3 Member states were not required to create separate institutions (only

separate accounts) for infrastructure management versus operations, and competitiveaccess to infrastructure was limited solely to international undertakings.


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Four years later,4 Directive 95/19/EC on the allocation of railway infrastructure and the

charging of infrastructure fees5 declared it is appropriate to establish a system for the

allocation of railway infrastructure and the charging of infrastructure fees which is non-

discriminatory and uniformthrough the Community [emphasis added].6 The Directive

added several significant considerations (or, at least, changes in nuance) to 91/440/EC:

The accounts of an infrastructure manager shall, under normal business conditions

over a reasonable time period, at least balance income from infrastructure fees plus

state contributions on the one hand and infrastructure expenditureon the other

[emphasis added]. (Article 6)

The infrastructure manager may finance infrastructure development including

provision or renewal of capital assets, and maymake a return on capital employed

[emphasis added]. (Article 6)

After consulting the infrastructure manager, Member Statesshalllay down the rules for

determining the infrastructure fees. These rules shallprovide the infrastructure manager

with the facility to marketthe available infrastructure capacity efficiently [emphasisadded]. (Article 7)

The fees charged by the infrastructure manager shall be fixed according to the nature of

the service, the time of the service, the market situationand the type and degree of wear

and tear of the infrastructure. [emphasis added] (Article 8)

In summary, Directive 95/19/EC: established the concept of financial stability of the

infrastructure provider; permitted the use of access charges to finance development of new

capacity and renewal of capital assets; required States to establish the rules for an

infrastructure access charging regime; established the concept that the infrastructure

manager should positively market services, not merely and passively wait for user requests;

and, highlighted the importance of the market situation (that is, the users response to

infrastructure access price and quality options) as a factor in establishing access charging

regimes.

ECMT Resolution 95/3 was designed to extend the measures taken in Directives 95/18/

EC and 95/19/EC to all ECMT Member countries and recommends that infrastructure fees:

1. Be determined by means that enable the infrastructure manager to market available

capacity efficiently.

2. Be determined essentially according to the nature of the service, time of service, market

situation, type and quality of infrastructure.

3. Be the same in identical circumstances.

The resolution was formally incorporated into the ECMT acquisin 2003 and thus applies

equally to the countries that have become full members of the organization since 1995.

Reflecting the Commissions accumulated experience and concern with slow progress

and problems encountered in railway restructuring, four new Directives were issued in

2001: 2001/12/EC, 2001/13/EC, 2001/14/EC and 2001/16/EC. The first three were proposed in

the Commissions First Package of rail reforms.

Directive 2001/12/EC increased the independence of railway operators (undertakings),

and specifically the infrastructure provider, from the budgetary accounting of the Member

States.7 It required the infrastructure manager to draw up a business plan that, among otherthings, would demonstrate a financial balance for the infrastructure business.8 Moreover, it

specifically required that the accounts of the operating businesses be segregated, with freight


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shown separately from passenger operations, and further required that the accounts for

publicly supported passenger businesses should be shown separately as well. The purpose

of these separations was to ensure that State support provided for a socially significant

service was not used to cross subsidize another service operated in competition with

unsupported providers. Finally, the Directive defined a new Trans European Rail Freight

Network (TERFN), on which railway freight undertakings were to be granted open accessafter March 2008, for providing international freight services.

Directive 2001/14/EC focused on the allocation of infrastructure capacity and development

of access charges for infrastructure. It found that previous Directives had not prevented a

considerable variation in the structure and level of railway infrastructure charges and the form

and duration of capacity allocation processes.9 It concluded that efficient transport

required further opening of the transport market, especially across borders and

emphasized again the need for transparent and non-discriminatory access charges. The

Commission also concluded any charging scheme will send economic signals to users.

It is important that those signals to railway undertakings should be consistent and lead

them to make rational decisions.10 The Directive paid particular attention to the

competitiveness of international rail freight. The following language, worth quoting in full,

implements these intentions: in order to obtain full recoveryof the costs incurred by

the infrastructure manager a Member State may, ifthe market can bear this, levy mark-ups

on the basis of efficient, transparent and non-discriminatory principles, while

guaranteeing optimum competitiveness in particular of international freight. The

charging system shall respect the productivity increases achieved by railway undertakings.

The level of charges must not, however, exclude the use of infrastructureby market

segments which can pay at least the cost that is directly incurred as a result of operating

the railway service, plus a rate of return which the market can bear [emphasis added].11

In summary at this point, the legislation strengthened the process of separating

infrastructure from operators (and financially separating the various operators as well) and

clearly established the intent in access pricing of making the infrastructure business

financially stable, with revenues from users plus support from governments fully equal to

long-term financial costs. In addition, the access principles recognized the status of access

charges as price signals and clarified the ability of Member States (acting through the

infrastructure businesses) to implement mark-ups above the cost that is directly incurred

as a result of operating train services. Significantly, though, the mark-ups imposed are not

supposed to be so high as to discourage use of the infrastructure by users that can pay the

direct cost but cannot pay their fully allocated share of total costs.At the same time, it deserves emphasis that the related objectives of financial stability

and rational pricing signals are only achievable when access charges are no lower than the

infrastructure managers marginal cost (MC). That is, neither the access regime nor the

levels of state support should result in access charges to the user that are lessthan the

infrastructure providers MC, because this would lead to irrational use of the infrastructure

(it would clearly not lead them to make rational decisions). Even assuming that the

contributions from the State actually do fully and reliably make up for the difference

between long-term full cost (FC) and access revenues, so that the infrastructure agency is

financially stable, access charges that do not cover at least the wear and tear on the

infrastructure (including renewals and replacements of the existing facilities, which are,in effect wear and tear effects displaced in time ) are thus not efficient, and do not meet

the test of the Directives.


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A second-best argument can be made: if access charges for highway, airway and

waterway facilities are below MC, then access charges for rail infrastructure might also be

set below MC to restore balanced inter-modal competition and this is explicitly allowed for

in Directive 2001/14. Ministers will want to ensure that all users pay at least marginal cost

for allforms of transport infrastructure if they are to avoid this kind of compromise.

The Commissions continuing determination to promote international freight railway

competition also led to the requirement that any mark up on international freight should

have particular regard to the effect on its competitiveness. This language implies that

international freight traffic should not be subject to the markups applied to other types of

traffic, certainly not if, in any way, the mark-ups discourage a potential use of the system.

To be precise, the language does not actually prohibit mark-ups on international freight

traffic access charges, though it does appear to discourage this practice. This said, it would

be very di ff icult to reconcile the language with charging higher mark-ups on

international freight traffic (export/import or transit) than on domestic freight traffic.

The Commissions Second Package is implemented in Directives 2004/49/EC, 2004/50/EC and 2004/51/EC. Directive 2004/49/EC deals primarily with strengthening the

licensing of railway undertakings to ensure that licensing will be compatible across Member

States and will not be used as a barrier to entry, though it does contain one provision stating

that the Commission may investigate cases in which there are disputes over infrastructure

allocation or charging. Directive 2004/50/EC aimed at improving interoperability of high

speed and conventional speed trains in the Union. Directive 2004/51/EC moved up the date

on which the national networks will be fully open to licensed operators: by 2006, both the

TERFN and the national networks must be open to licensed international operators; by

2007, access rights to the entire EU rail networks shall be available to all operators, including

those engaged in cabotage (haulage purely within one country).The Commissions Third Package was tabled in March of 2004. It has the objectives of:

opening international passenger services for competition by 2010 (2004/0047 COD));

certification of train crews (2004/0048 (COD)); provision of international passenger rights and

obligations (2004/0049 (COD)); and, provision for compensation in cases of non-compliance

with contractual quality requirements for rail freight services (2004/0050 (COD)). The latter

proposal includes provisions for the liability of the infrastructure manager in cases where

freight quality commitments are not met through the fault of the infrastructure manager.

1.3. The potential objectives of infrastructure separation

The Commission has had to struggle with an immensely complex challenge. Part ofthe difficulty has been in formulating the reform process: the Commission has been

leading a multi-country process on a reform path that has never been conducted anywhere

outside the EU and it is not surprising that the approach has had to evolve with experience.

Part of the challenge remains developing a clear and agreed set of objectives for the

reform. The objectives have also evolved with experience. It is important to restate the

potential objectives in order to assess the ability of the existing access charging regimes to

meet those objectives. Very briefly the objectives (not necessarily in order of priority) are:

Improved efficiency in national and international transport, and reflecting the social

costs of transport.These two appear to be the most basic to the EUs purpose, and are

driving the Commissions actions in all areas, not just transport.


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Clarifying government roles in supporting railways and promoting competition in

railways, especially on an international scale, while breaking up the old national boundaries

as they applied to operators(infrastructure boundaries are not as important, so long as they

do not act to limit cross-boundary operations). This led to infrastructure accounting

separation at the outset and, over a longer period of time, to more and more open access.

The required separation began on an accounting basis, but with a significant ambiguitybecause the initially required separation was only infrastructure versus operations and

did not require full accounting separation by the various operating lines of business

(LOB). Government roles and support differ greatly among the parts of the systems. The

rules do not limit support to infrastructure but prevent it being provided in a way that

could lead to restrictions on access to the infrastructure;12 support to systems that

perform social services is permitted, but must be restricted to these services. These parts

of the system must be delimited in order to ensure that support for one function does

not leak into others. As discussed below, however, the EU railways have not (yet) actually

provided transparent, public reports along the lines of separation required, so it remains

difficult to determine where State support is actually being targeted and spent.

Financial stability for the infrastructure provider. The Commission has recognized the

conflict between the socially optimum approach to access pricing (pure Social Marginal

Cost (SMC) pricing) and the need for the infrastructure provider to be financially stable

(with incomes covering all financial costs). The Commission also realized that some

Member States would not want to pay from public funds the entire difference between

SMC and full financial costs, which led to the allowed mark-up policy.

Enhanced business focus. The Commission explicitly used the term business to

describe the infrastructure provider as well as the operators. The separated structure of

the railways greatly clarifies the performance of each of the parts, and should enhancethe ability of each of the businesses to focus on the needs of its particular market.

Attracting private investment. Though the Commission does not take any position on

private versus public ownership, it is clear that the EU railways (especially in freight and

long distance passenger transport) will face powerful competition from privately owned

and operated trucking and inland water transport companies and from discount airlines.

By breaking the railway sector into separated and smaller pieces, each of which is

market focused, the ability of each piece to compete should be improved, and the

opportunities for attraction of private investment in appropriate places should increase.

The Commission has faced very strong resistance to the Directives, and

implementation has been slow and incomplete. Member State governments have, in someinstances, resisted the changes because of a desire to continue to protect domestic markets

(among other domestic issues). Member State railways have also fought against the

changes, partly because of a concern for the costs of implementing the new, separated

structures, and partly because of a fear of the potential effects of function-by-function

financial transparency and entry of competitors. It is important in reviewing the progress

to date in developing access charge regimes to note that many Member States have made

only the narrowest construction (or less) of what was required; few have taken a proactive

lead in developing charges suited to facilitating the development of a single, pan-European

rail market. All have taken a national approach: few (if any) have tried to incorporate EU-

wide objectives such as ease of access charging across boundaries. Collective results rarelyexceed individual intentions, and this case is no exception to the rule.


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ISBN 92-821-0351-X

Railway Reform and Charges for the Use of Infrastructure

ECMT 2005


Chapter 2

Rail Infrastructure Charges in Practice


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2. RAIL INFRASTRUCTURE CHARGES IN PRACTICE


the least distorting way possible. This approach to pricing may be referred to as marginal cost

pricing with markups (MC+). This is of course the approach required by Directive 2001/14,

and is applied in most countries of Western Europe, with target levels of cost recovery

ranging from 5% (Sweden) to 63% (France). Most countries see this approach as meaning

charging at least part of maintenance and renewal costs, sometimes also traffic management

costs and sometimes a contribution to investment. Italy is unique in that maintenance andrenewals costs are not charged for; only traffic management is included in the charges.

The second philosophy starts from the concept of the infrastructure manager as a

commercial organization needing to recover its costs. Whatever costs are not funded

directly by the state need to be shared out among users of the infrastructure in an efficient

and equitable manner. This approach to pricing is referred to as full cost recovery after

receipt of grants (FC). The sole exponents of this approach in Western Europe are Germany

(60% cost coverage) and Italy (40% cost coverage). In Germany, the approach is applied to all

costs except some investment costs; in Italy it is only applied to train planning and operations.

At privatization Great Britain also sought to cover full cost but mainly by the use of two-part

tariffs, with the variable element of the tariff reflecting short run marginal cost. The situation

now in Great Britain is that two part tariffs still exist for franchised passenger services (the

majority) while open access passenger and freight operators pay marginal cost. However the

full cost approach is widely followed in Eastern Europe, with the Baltic States, Hungary, Poland

and Slovakia adopting it with cost recovery ranging from 50% to 100% and Slovenia regarding

it as a target, although it only covered 9% of costs from charges in 2004.

While these may be presented as totally different approaches to the setting of charges,

in practice there are strong commonalities between them. Firstly, even a purely commercial

organization has an important reason to study its marginal private costs as these determine

the companys pricing floor. Traffic unable to pay this price should not be carried. Given thepresence of high fixed costs in rail transport, it will be necessary for an unsubsidized

commercial body to charge traffic considerably above marginal cost on average, and a

purely commercial organization will seek to discriminate between types of traffic according to

their willingness and ability to pay, in order to achieve the highest margins possible.

But within Europe even commercial rail infrastructure managers are not unregulated

profit maximizers. Rather they are public or regulated private organizations whose charges are

limited to what is necessary to meet their financial requirements. To this extent, they face

essentially the same budget constraint as that faced by an organization that starts with the

philosophy of marginal cost pricing there is no suggestion that pure marginal cost pricing is

desirable if it leaves the infrastructure manager without the necessary funds to maintain andrenew the system. EC legislation makes it quite clear that infrastructure managers must

produce plans which balance receipts from charges and subsidies with necessary expenditure.

Thus there is no necessary contradiction between the two philosophies; full cost

recovery after receipt of grants and marginal cost pricing with markups can be completely

consistent with each other. Where the difference does appear to lie in practice is in the

degree to which the full cost recovery after grants approach seeks to identify marginal cost

as its pricing base, as opposed to allocating costs on other grounds, which may not involve

calculating marginal cost at all. This may reflect differing perceptions of the relative

importance of efficiency and equity in cost allocation. There is a common argument that

the fairest way to finance infrastructure is to share out the total costs according to some setof indicators, reflecting cost causation when this is feasible, and simply reflecting use in

the case of genuine joint costs. However, there is no reason to suppose that in general such


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an approach is either efficient or equitable. In terms of efficiency it might exclude traffic

that was willing to pay its marginal cost; in terms of equity there is no reason to suppose

that the benefits from use of the system are distributed in proportion to use, and certainly

this sort of pricing rule takes no account of either willingness or ability to pay.

Marginal social costs may be subdivided into marginal private costs and marginal

external costs. Marginal private costs are the costs borne directly by the infrastructure

manager. These generally comprise wear and tear costs (which may result in additional

maintenance costs and accelerated renewal of some components), some train planning

and operations costs and congestion or scarcity costs. Strictly, congestion costs(which are

additional delays to other operators trains resulting from higher capacity utilisation) are

borne directly by train operating companies, rather than the infrastructure manager, so

they are not part of the marginal private cost of the infrastructure manager. But they may

directly affect the demand for track access by affecting the quality of service provided, and also

there may be conditions requiring the infrastructure manager to compensate train operators

for delays. In either case there will be a cost, or a loss of revenue, to the infrastructure manager.

In addition, use of rail infrastructure imposes external costsof noise, air pollution,

global warming and possibly some elements of accident costs. Marginal social cost pricing

requires these costs to be charged in the form of Pigovian taxes. But it is not appropriate that

revenues from these charges should go to the infrastructure manager. To take a crude example,

this might give an incentive for infrastructure managers to earn more money by attracting

more polluting trains. Rather, the receipts from Pigovian taxes should go direct to the state.

Mention has already been made of the notion of scarcity charges, which are charges

to be levied when demand exceeds capacity, and it should be noted that there are two

competing philosophies of how to calculate these. In the pure short run, when selling slots

on a spot market, it is the cost of pushing another service off the tracks, or into an inferiorslot, that is relevant. In a longer term track access agreement which grants specific access

rights, it may be more appropriate to think in terms of the costs of providing capacity for

those additional slots. These two approaches are known to economists as short run and

long run marginal cost pricing respectively. When capacity is optimally adjusted, and in

the absence of indivisibilities, the marginal cost of additional capacity is equal to the value

of the marginal additional train, so the two costs are equal. But given the long time scales

of rail infrastructure investment that is often not the case, and a choice has to be made.

Charging short run marginal social cost gives the correct incentives to train operators for

the optimal use of existing capacity. Charging according to actual expenditure on increased

capacity gives the correct incentives to the infrastructure manager to expand (or contract)capacity. (In both cases, this assumes that the revenue earned by the train represents its

social value, so there must be appropriate taxes and subsidies in place to represent any

external costs and benefits of the train in question for the incentives to be correct).

It is not possible with a single charge to get both sets of incentives correct. A choice has to

be made as to whether to charge at short run marginal social cost, and rely on other measures

to achieve optimal investment, or to sacrifice some benefits in terms of current infrastructure

utilization to get the investment incentives right. The problem with the alternative long run

pricing approach is that some traffic able to pay its short run marginal costs (and therefore

productive from a socio-economic perspective) will be priced off the system. This problem is

avoided if the costs of capacity are charged as a fixed element in a two part tariff, varying withlong term capacity requirements but not with day to day changes in train service levels.


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If charges are based on short run marginal costs, optimal investment can be promoted

through regulation, where the Regulator has powers to require the infrastructure manager

to undertake worthwhile investment. In Britain, for example, it is a license condition that

Network Rail should undertake investment agreed as part of the Network Management

Statement. Optimal investment can also be promoted through Government grants based

on social cost benefit analysis.

Most of the planning of rail services and most decisions on the allocation of access

rights relate to the timetable period. Thus it is costs that vary over this period of 1-2 years

rather than a very short run approach to costs that is most relevant, even if a short run

marginal social cost pricing approach is decided upon.

A common starting point in costing is the division of costs into fixed and variable

costs, and a brief comment on this categorization may be useful at this point. Fixed costs

are generally defined as those costs which do not vary with output. Which costs vary with

output depends, however, on the time period over which we are looking. In the very long

run, the only costs falling into this category are the sunk costs of past investments that donot need to be renewed. In the very short run, most costs other than power and wear and

tear may be fixed. Different approaches between different railways may therefore arise

because they have a different time period in mind when setting the charges and when

defining fixed and variable costs (see Table 2.2).

The definition of fixed costs may also depend on the range of output changes under

consideration. Rail costs may rise with output in a non-linear fashion, and indivisibilities

may introduce steps into the function. Some railways consider any extra costs incurred

when traffic is non-zero to be variable costs. In this case all maintenance and renewal costs

would be variable costs, as well as signaling and train planning, since it is unnecessary to

do these unless the system is to be used to move traffic. Other railways (for instanceNetwork Rail and the rail Regulator in Britain) regard as fixed those costs which would be

incurred regardless of traffic levels given that particular types of traffic are using the

Table 2.2. Categories of costs included in variable charges

Maintenance RenewalsTrain planning

and operations

Congestion

and scarcityAccidents Environment

Austria

Czech

Denmark

Estonia Finland

France

Germany

Hungary

Italy

Latvia

Netherlands

Poland

Portugal

Romania

Slovenia

Sweden

Switzerland Noise bonus

UK


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system, and possibly also within a certain range of existing levels. Consequently these

railways treat as variable only those costs that vary when traffic varies beyond a certain

range. Many, and perhaps most, elements of maintenance, signaling and train planning

costs may then be considered to be fixed.

In general one would expect the latter approach to give an average variable cost which

was a much better approximation to marginal cost than the former, although there is a risk

of always failing to take account of the steps in the function, reflecting discrete changes

in the resources needed when some discrete change in facilities or maintenance standards

becomes necessary. These steps may be represented by the notion of avoidable costs

the avoidable costs of a particular type of traffic being the variable costs given that such

traffic is running plus any fixed costs that would be avoided if the traffic in question

ceased. For instance some costs of providing for high speeds may be fixed as long as high

speed trains are using the system, but avoidable if only slower trains are running.

It is also worth mentioning the concept ofjoint costs, i.e.costs that are only avoidable

if more than one type of service is withdrawn. For instance suppose that a particulardouble track route is used for local passenger, fast passenger and freight services, and

suppose that it may only be reduced to one track if two of the three types of train are

withdrawn. In this case the costs of maintaining a second track are joint, and will not enter

into the avoidable cost of any single type of train.

The analysis of avoidable costs is very important for decisions about the desirable

capability of the network, in terms of quality and capacity. Infrastructure necessary for

particular types of service can only be provided if someone (be it government or users) is

willing to bear the avoidable costs, and it is appropriate to charge these to the type of traffic

in question as a fixed charge, which will only vary in the long run as decisions to change

the quality and capacity of the infrastructure are taken. Likewise joint costs have to beborne by someone, but if charged to users this needs to be done in a way which does not

distort their decisions as to what level of service to run. Again, this may be as part of the

fixed element of a two part tariff, but the problems of two part tariffs where there is on-track

competition, and especially for international services, have already been remarked upon

and are discussed further below.

Where mark ups are necessary, it is necessary to give careful thought to how best to

introduce them, to minimise the distortions to which they lead. A general principle will be

to minimise the loss of traffic that is willing to pay marginal social cost. The degree to

which traffic is willing to pay more than marginal social cost will normally vary by market

segment, both in terms of broad market sectors (high speed passenger, regional passengerfreight) and more detailed market segments (e.g.coal, containers) and therefore mark ups

should vary as well.

One final comment may be made on matters of principle. If there were no costs

attached to the setting and use of complicated tariffs, then it would be desirable for tariffs

to reflect all the factors that cause each element of costs to vary train weight, speed, type

of rolling stock, etc. To the extent that complicated tariffs are seen to have an additional

administrative cost(for instance in collecting the relevant data), and that train operating

companies may fail to react appropriately to them, there may be a case for more simplicity.

Moreover the balance of advantage between simplicity and complexity may vary with the

mix and nature of the trafficon the system in question a system that is very homogenous

has less need of complicated tariffs than one with much greater diversity of traffic.


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2.2. Implementation simple and two part charges

The tools available to implement an access charge regime are basically of two types,

simple charges and two-part charges.

Simple charges are directly variable with measures of use: gross tonne-km, net tonne-

km, passenger-km, train-km, kW and kWh of electric traction used, per cent of revenue,1

etc. These can be weighted by: speed, axle loadings, types of rolling stock, the specific

route (including the geometry requirements of the route), time of day, and freight

commodity, among many others. Simple charges are probably more effective in collecting

marginal (direct) costs, and they may be more effective in charging for social costs and

externalities. They are more distorting in collecting allocated shares of fixed costs and they

may not give effective signals to encourage the financing of added capacity. If used to

collect fixed costs they may no longer give the right signals to use existing capacity to

the full. Simple charges might be most appropriate for a relatively simple network, with

few users and where traffic is not approaching network capacity (Norway, for example).

Two-part charging systems have one or more parameters related directly to use, such asthe variable parameters above. In addition, two-part systems have a second component

based on the capacity forecast to be used or on some estimate of the fixed costs of the

system to be recovered. This second component, sometimes called the fixed component,

can be based on scheduled path-km, or scheduled train-km, among other options. The

second component can also be weighted by factors such as path quality, scheduled

speed, particular line, time of day, etc. It is significant that most of the second component

factors tend to be passenger service-driven (particularly by commuter traffic) rather than

freight-related: that is most freight users can adjust their usage to avoid peak time use (and

thus do not have to burden capacity) whereas most passenger traffic must travel at times

and at speeds that increase the need for capacity. Two-part regimes are more efficient atrelating use to economic cost, but they raise an issue of potential discrimination among

users. Two-part regimes also tend to be more complex and expensive to implement.

Two-part systems are often said to have a variable part and a fixed part. This may

be somewhat misleading in the current context, since the so-called fixed part is often

related to some measure of expected system use. In practice, the difference is that the

variable part tends to be related to actual, measured wear and tear usage, whereas the

fixed part tends to be related to the planned use of capacity. Where this simply reflects

elements of marginal cost, in terms of train planning costs or use of scarce capacity, this

cannot be regarded as discriminatory. However, a heavy loading of costs on to these

elements combined with a requirement to reserve paths may discourage small operators,

particularly freight operators, where actual capacity requirements are particularly uncertain.

When the fixed element of the tariff represents an access charge that is not related to

planned use, or which varies with planned use in a way that gives large discounts for bulk

purchase that are certainly not related to cost savings, in an environment in which there is

actual or potential on-track competition, it is clearly discriminatory (and illegal under EU

Directive 2001/14). Whilst such a fixed access charge might have the advantage of not

affecting the choice of output level of the dominant operator, and might allow the recovery

of truly fixed costs (such as vegetat

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